Zhihu Inc. Q3 FY2023 Earnings Call

Thank you, operator. Hello, everyone. Welcome to our third quarter 2023 financial results conference call. Participants on today's call will include Mr. Zhou Yuan, Founder, Chairman, and Chief Executive Officer of Zhihu; Mr. Li Dahai, Chief Technology Officer; and Mr. Henry Sha, our Chief Financial Officer. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our IR website at ir.zhihu.com. I will now turn this call over to Mr. Henry Sha, CFO of Zhihu.

Thank you, Iris. I'm pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder and CEO of Zhihu. Hello, everyone. Thank you for joining Zhihu's third quarter 2023 earnings call. During the quarter, we made considerable progress in our multi-engine commercialization across the entire community, boosting our total revenue by 12.1% year-over-year. Notably, revenues from our membership and vocational training business increased 39.2% and 85.6% year-over-year, contributing 45.7% and 14.2% of our total revenues, respectively. Throughout the quarter, we continued to unlock the vitality and prosperity of the Zhihu community, inspiring our content creators' high-quality production while continuously expanding our user base and encouraging user interaction. Our number of MAUs reached another milestone for the quarter, rising to 110.5 million. We continue to view cost control and operational efficiency as one of our strategic priorities. Consequently, we've witnessed a 5 percentage points increase in our gross margin, bringing it to 53.7% for the quarter, along with a notable 10.1% reduction in our non-GAAP net loss compared to the previous year. Going forward, I will be dedicated to leading the team to enhance our operating efficiency and further narrow losses. Now I'd like to delve into the details of our third quarter initiatives and discuss our progress concerning content and creators and the commercialization progress... ...In short, Zhihu's success and resilience are underpinned by our dynamic ecosystem with high-quality content at its core. With progress across content and commercialization of our diverse revenue streams in this quarter, we are well-positioned to capture driving healthy and sustainable growth while enhancing profitability. Going forward, we will continue to seek and seize opportunities to empower users and creators with advanced technology, creating value for all of our stakeholders. This concludes Mr. Zhou Yuan's remarks. Now I will turn to our financial details in the third quarter. For a review of our third quarter 2023 results, please see our press release issued earlier today. I am pleased to announce another solid quarter with accelerated progress in our multi-engine commercialization, driven by robust growth in paid membership and the Vocational Training business. Our total revenues for the quarter increased with strong resilience, rising by 12.1% year over year, which is in line with our management's guidance provided previously. As we consistently broaden and diversify our products and service, paid membership revenue for Q3 increased by 39.2% year-over-year, while Vocational Training revenue increased by 85.6% from the same period of last year... ...Our paid membership revenue for the quarter was RMB 466.8 million, up 39.2% from RMB 335.4 million for the same period of 2022. This increase was propelled by the continued growth of our subscribing members, which increased by 35.9% year-over-year to 14.8 million. Our Vocational Training business revenue for the third quarter was RMB 144.8 million, up 85.6% year-over-year. This organic growth came from new course offerings provided by our existing business. And notably, our newly launched online courses for ESG-related examination preparation received excellent feedback from our users... ...and we look forward to sharing more details of these projects once they are available. By leveraging our technology and operations capabilities, we are confident we can share the massive value and influence of our IPs with our users, content creators, and business partners. We will continue advancing the development of our high-quality IP content and integrate AI technologies from content creation to commercialization...

So first, I want to congratulate you on receiving the approval for your large language model Zhihaitu AI. Could management provide an update on the latest progress of this model and the plans for future monetization?

This is Dahai Li, CTO of Zhihu. To summarize, Zhihu is well positioned as a content community that has high-quality content and data on its platform, and we have made tremendous progress in terms of building out our large language model capabilities in the past few months. And in the future, our key focus will be on the application of our Zhihaitu AI into different business scenarios on our platform. And more specifically speaking, our Zhihaitu AI is now upgraded to 100 billion level parameters of multi-model large language model. And in early November, we have obtained the regulatory approval for our large language model. In terms of application, internally, we have used our Zhihaitu model into different search aspects of our daily operations. And speaking of content comprehension, our large language model has been used on the content classification, our content search, and recommendation to enhance its operating efficiency. For example, in the past, our content classification system upgrade takes about 1 quarter and now is shortened to 2 weeks. In this way, we will enhance our user engagement. In terms of our marketing services, our large language model helps us refine the titles of our content commercial articles and helps us refine our content products to enhance our commercialization conversion rate. Our multi-model large language model also facilitates the generation of cover pictures of stories of our paid membership business. And in this way, users will be able to interact with the virtual characters of our short stories and get an in-depth understanding of the contents of the stories. Speaking of our Vocational Training business, our large language model helps the system to correct the essays for our students and also help our tutors to answer the basic or frequent questions from the students, in this way to enhance the operation efficiency of our Vocational Training business. In terms of our content auditing, the large language model can effectively filter low-quality content and identify non-compliant material in our questions and user reviews, thereby enhancing overall efficiency and accuracy. So in terms of our future plans, with the approval of the regulators, we plan to utilize our Zhihaitu AI into more products or functions that can be accessed by our users to enhance our content creation and consumption experiences. AI at Zhihu is a very important opportunity. And through the R&D of Zhihaitu AI’s large language model and continuously upgrade our basic model capabilities, we will provide better experiences for our users and content creators and also enhance our commercialization efficiency.

Congratulations on another solid result. The Membership business once again demonstrates strong growth this quarter. What's the strategy for this business in the future? And how does the company view the recent development trend of micro drama series?

As our CFO previously mentioned, in the third quarter of this year, our revenue from the paid membership business grew year-over-year by 39.2%, with an average of about 15 million monthly paying users. We have also built a significant audience and content creator base for our paid membership business. Our content business has performed well, and our paid membership business is showing strong growth. We are currently exploring the commercialization of our content IP. In October, our hit drama, Scent of Time, was released on Youku and gained significant market appeal. Our paid membership business has consistently improved in terms of operating efficiency thanks to technological innovation. As Dahai just mentioned, with the approval of AI large language models, our AI technology will assist us with the Writer's Assistant and the generation of cover images for our stories in our membership business. And the final aspect I would like to mention is that we are constantly exploring different means of media for our paid membership business. In our Yan Selection business, we not only have the rapidly developing short video dramas in China, but we also have approximately 100,000 stories or pieces of content in our paid membership business. We will continue to innovate our media to enhance our paid membership business.

And Xueqing Zhang, this is Henry, the CFO of the company. To address the CEO's comments regarding the short form and the TV drama, we see this as a significant market with great potential. As the CEO pointed out, Zhihu has a vast library with over 100,000 stories. We are confident that the market will appreciate the value of Zhihu’s intellectual properties in this unique and rapidly growing market.

Will management share some insights about the recent developments in the marketing service business and the performance during Double 11? What is the outlook for this business in 2024?

To highlight some of the significant advancements in our Double 11 campaign, our content commerce solutions business achieved notable milestones during the previous Double 11 event. During the Double 11 period, our relevant content search volume has increased year-over-year by about 188%. Additionally, the average selling price of our commerce products has exceeded USD 1,300. In terms of various aspects of our content marketing services, focusing on our IT, 3C, and home appliances sectors, we have seen business volumes grow by double digits year-over-year. Additionally, other sectors such as outdoor products, consumption, and cosmetics have also shown significant growth. We have established partnerships with numerous e-commerce platforms regarding our data and other aspects. During the Double 11 period, we saw a significant increase in transaction volumes and new client rates for our marketing services. Finally, looking ahead to next year or the fourth quarter of this year, we have observed a recovery trend in our marketing services. With the enhancement of our performance-based marketing solutions, we are confident that next year our marketing services will experience a more significant recovery.

I will translate myself. My question is about the education business. We noted that Zhihu's education segment's year-on-year growth rate is still quite strong this quarter. Can management share your view on the growth rate and the margins for your Vocational Education business for the next few quarters?

In terms of our revenue from the Vocational Training business, it's rapidly growing. For this quarter, the revenue from Vocational Training has grown 85% year-over-year compared to the same period last year. And during the first half of this year, the revenue of the Vocational Training business is already comparable to the full year last year. In our platform, we already offer more than 10 different types of courses. We have been closely monitoring user growth data in our business operations, and I'll provide a more specific example. In this quarter, the Vocational Training business has exhibited a notable trend. Certain genres offered on our platform, such as ESG and Artificial Intelligence-related courses, are specifically aligned with the increasing market demand for career advancement among our users. For instance, the AI-related courses have experienced nearly double or triple growth in recent months. And moving on to the future, I think our key focus will be on expanding the variety of courses on our platform. Additionally, with the assistance of AI, our operating efficiency will be improved.

Daisy to conclude, so – we have the focus on our Training business, okay? So I think this Vocational Training business will achieve more than like a 20% year-over-year growth in next year. But as Zhou Yuan, our CEO mentioned, we made a technology investment, integration in this business. So we believe that it is still in the investment stage of the business.

My question is about margin and the operating expense trend. Can management provide insights on the outlook for our gross profit margin as well as the operating expense outlook? Additionally, could management comment on the timeline for reaching breakeven?

So our outlook for the GP margin, that will somehow be more certain or more sustainable at around maybe 53% to 55% as we are improving our utilization. As you may know, as we introduced in the remarks that we said that we improve our utilization of the cloud services and the focus on improving the operation efficiency for the cost control. And as you can see, we have a shift in our revenue structure... And about the breakeven point, we believe that will happen in the next year.

I have a follow-up question to Thomas' question. Can management share more quarter-to-quarter trends for the breakeven timing? And is there any information you can provide on the selling and marketing expense?

Eileen, this is Henry. Because we are in the year-end budgeting work stream, so I think we will update with the markets our progress about the breakeven point. We believe that will be somehow in the next quarter. About the sales and marketing, as I mentioned in the previous question, we believe that there is still some percentage point space to lower our sales and marketing as a percentage of our total revenue next year.

Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or Piacente Financial Communications. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you all.